Raise Your Prices—the Right Way
When Bob Noriega took over AutoWorks of Tampa in Tampa, Fla., in 2013, the shop was writing service at $80 per hour—a labor rate especially low for import shops like AutoWorks. He knew it was low, he says, but for years he was scared of chasing off customers by raising the price.
“Really, the fear was always with me,” he says. “I think it’s something that we do mentally to ourselves. It’s fear of the unknown.”
Bob Cooper, president of industry consulting firm Elite, says it’s a problem he sees with nearly every shop that works with his company.
“It really is a misunderstood science,” Cooper says. “They don’t know how to do it. Typically they’re not charging enough and they’re not delivering a good value.”
Cooper understands the fear that shop owners have regarding increasing price, and he concedes that shop owners do need to be careful when implementing increases. But if they use a thoughtful step-by-step strategy for increasing prices fairly and correctly, there’s no reason to worry about losing customers.
It’s how Noriega increased his labor rate to $106 while still increasing his car count and repeat customers.
Cooper and Noriega outline how often to revisit your pricing, how to decide on the correct price increase and how to tell if your increase is going over well with customers.
1) All price increases should be done through your labor rate. The reality is, you need to be making your income off your labor, and with today’s service-conscious customer, defending a higher labor rate is much easier than a high price on a part, Cooper says. Customers will likely go online and look up a part price, and if they see that your price is higher, that’s going to be a tough sell. In the customer’s mind, a part is a part, Cooper says.
“If your labor rate is the highest in town, that’s something your advisors should be able to easily defend because your technicians aren’t just technicians; your technicians are superstars,” he says.
If you’re not making the margins necessary on your parts, then you should start using a parts matrix, which is what Noriega started doing at the same time he increased his labor rate. But beyond ensuring he’s meeting his margins, he says he doesn’t touch his parts prices. (To learn how to build a parts matrix, go to ratchetandwrench.com/partsmatrix.)
2) Look at your competition. This is the first place you need to start, Cooper says. Take a look at shops in your area or in your business development group that offer comparable service and see what they’re charging to make sure you’re not unreasonable.
“I’m not suggesting that this is the end-all,” Cooper says. “I’m suggesting that you have to be reasonably competitive. The commodity items—oil, tires—they have to be really competitive with those.”
For Noriega, he noticed his labor rate when he started attending training and working with a consultant. After interacting with other import shops, he says he was able to gain an understanding of the labor rate he should be at—and the type of service he would need to offer if he wanted to be at that level.
3) Revisit your pricing once a quarter. If you’re priced reasonably, Cooper recommends looking at your prices at least once a quarter. That doesn’t mean that you should raise your prices every quarter, but it should be revisited. When Noriega was trying to correct his shop’s major deficiency in price, he increased his prices roughly three times per year.
At minimum, Cooper says you should raise your prices at least once per year.
“[J]ust because you can charge more doesn’t mean you should. That’s what I call the ‘grandmother rule.’” —Bob Cooper, president, Elite
4) Price increases should be small and incremental. A price increase of 3–4 percent is sizable enough that it will make a difference, while still considered acceptable by your customers, Cooper says.
“Don’t get silly,” he says. “One of the things I’m big on is just because you can charge more doesn’t mean you should. That’s what I call the ‘grandmother rule.’”
Bottom line: Don’t pick the customer’s pocket, Cooper says. If you want to grow your company even more or experience increased profitability, you may need to consider opening a second store, expanding or bringing in more customers. But unnecessarily squeezing more out of each customer isn’t the way to do it, he says.
If you’re correcting a deficiency, like Noriega was, or bleeding money and can’t afford to pay your bills, you can increase your prices more than 4 percent. Noriega, for example, initially raised his labor rate from $80 to $85 and then six months later, raised it to $93.50.
“We’ll definitely do that with those clients,” Cooper says. “We know that as soon as that’s done, he’s going to lose the customers who are looking for the lowest price in town. We know that, but we’re also helping him recreate a different business model than he had in the past.”
5) Explain the increase to your staff. All of your employees should know what you’re doing when it comes to pricing, Cooper says. That way, service advisors won’t hesitate when it comes to recommending service and technicians won’t think you’re overcharging. Cooper recommends holding a meeting and breaking down all the costs associated with running a business. Doing so can be eye opening for many employees, Cooper says.
Noriega had a similar meeting with his staff, and found that employees were universally accepting of the increases.
6) Monitor customer reaction at the point of sale. After implementing a price increase, Cooper says to pay attention to customer reaction, starting with declined work at the point of sale to ensure there isn’t a significant increase. If there is an increase in declined work, that’s a sign that your service advisors need to strengthen their selling skills and sell the value of your shop.
7) Monitor customer reaction after the sale. There are two ways to do this: by monitoring your online reputation and by following up with customers. When it comes to online reputation, observe if customers are commenting on your price, and if so, what the reaction is. Noriega was surprised to find that after increasing his prices, he received more reviews from customers commenting on the fairness of the price. In addition, he also calls every customer three days after the repair to ensure customer satisfaction and answer any questions.
“I’ve found that in those conversations, your personality types that aren’t dominant and not up front with you will reveal things they had in the back of their minds,” he says. “And it was never that price was a concern.”
8) Track the number and percentage of returning customers. Cooper says that ultimately, the true judge of pricing is customers and if customers continue to return to your shop and refer others, it’s a safe bet they’re comfortable with your pricing.
“As soon as they raise their prices, they think, ‘That guy was right. I’m now making more money.’” —Bob Cooper, president, Elite
Not tracking returning customers is the biggest mistake Cooper sees shops making and it’s because many shops fall victim to what he refers to as “the pied piper”: management companies telling shops to raise their prices dramatically by promising they won’t lose a single customer.
“As soon as they raise their prices, they think, ‘That guy was right. I’m now making more money,’” Cooper says. “Nine months later, customers leave. The argument that I have with these guys is that not all customers are going to complain at the point of sale because they want their car finished and they want it back.”
There is one caveat, however: If you’re not overpriced and customers aren’t buying into the price increases you’ve made, those are not your customers, Cooper says.
You can expect to lose some of those “bottom-feeder” customers, but by supplementing that loss with increased marketing, you’re ultimately positioning your shop to take on better and more loyal customers (for more information on firing bad customers, visit ratchetandwrench.com/rwbadcustomers).